NOTE 17: VARIABLE INTEREST ENTITIES

The Company performs ongoing qualitative assessments of VIEs it is involved with to determine if the Company has a controlling financial interest in the VIE and therefore is the VIE’s primary beneficiary. If it is determined to be the primary beneficiary, the Company consolidates the VIE in the Company’s Consolidated Financial Statements.

Consolidated Variable Interest Entities

During the year ended September 30, 2014 and the first quarter of fiscal 2015, Grupo Finmart participated in the formation of three VIEs that purchased Mexican Peso denominated long-term unsecured Mexican consumer loans originated by Grupo Finmart whose borrowers were Mexican government employees at the time of loan origination. Each VIE issued its notes to third party investors and used the related net proceeds to purchase the loans from Grupo Finmart at a premium over their principal amount. The creditors of the VIEs do not have recourse to the general credit of EZCORP, Inc. We consolidate these VIEs as we have the power to direct the activities that significantly affect each VIE’s economic performance and have the right to receive benefits or the obligation to absorb losses that could potentially be significant to each VIE.

The first VIE (“VIE C”) was formed in October 2013 as a trust with third party "Investor C" as the purchaser of its Mexican Peso denominated notes and the VIE’s first beneficiary. The second VIE (“VIE B”) was formed in March 2014 (amended in June, September and December 2014) as a trust with "Investor B" as the purchaser of the VIE’s U.S. Dollar denominated notes and the VIE’s first beneficiary. The third VIE (“VIE A”) was formed in June 2014 as a trust with "Investor A" as the purchaser of the VIE’s Mexican Peso denominated notes and the VIE’s first beneficiary. Grupo Finmart is the servicer of the VIEs’ loans. In August 2014, "Investors D" and "E" purchased a portion of VIE A’s notes from "Investor A" and became additional VIE A first beneficiaries. Each VIEs’ notes are payable solely from the VIE’s assets. Grupo Finmart receives 100% of VIE C and B cash flows and 50% of VIE A cash flows after: 1) the related VIE’s operating expenses are paid, and 2) the related VIE's notes are repaid. Grupo Finmart has an option to repurchase VIE A’s loans. VIE A is the only VIE for which Grupo Finmart can be terminated as servicer for reasons other than cause, with termination requiring unanimous first beneficiary approval.

VIE B has entered into foreign exchange forward contracts with Grupo Finmart to mitigate the risk associated with its U.S. Dollar denominated assets and Mexican Peso denominated liabilities. Grupo Finmart has entered into an offsetting foreign exchange forward contract with a third party. See Note 15 for additional information regarding the fair value of the forward contract.

The loans Grupo Finmart transferred to the VIEs at the date of transfer were as follows:



Description of Portfolio	Carrying (Par) Value of Principal of Loans Transferred		Carrying Value of Accrued Interest of Loans Transferred		Principal of VIE Promissory Note Issued at Par

	(in millions, except number of loans)
14,500 payroll loans transferred to VIE C in October 2013	$	14.0	$	0.7	$	19.3
7,500 in payroll loans transferred to VIE B in March 2014	10.0		1.3		16.0
7,100 in payroll loans transferred to VIE B in June 2014	10.0		2.1		16.5
8,500 in payroll loans transferred to VIE A in June 2014	14.0		2.3		21.8
16,135 in payroll loans transferred to VIE B in September 2014	26.7		3.3		43.8
10,900 payroll loans transferred to VIE B in December 2014	13.9		1.5		22.0

In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.

The assets of the VIEs can be used only to settle obligations of the VIEs. Information about our involvement with VIEs has been aggregated as the VIEs are similar and we believe separate reporting would not provide more useful information. The assets and liabilities of our consolidated VIEs described above are presented in our condensed consolidated balance sheets and are net of intercompany balances which are eliminated in our condensed consolidated financial statements.

The loans the VIEs purchased from Grupo Finmart are reflected in our consolidated financial statements at amortized cost based on Grupo Finmart’ s pre-transfer basis. We did not recognize any gain or loss as a result of the loan transfer to the VIEs or from the consolidation of the VIEs. The excess of the principal amount of each VIE’s notes payable over the principal amount of the VIE’s loans (this is the unamortized loan premium paid by the VIEs) is to be repaid using a portion of the VIE’s loan interest as the coupon of the VIEs’ loans are greater than the coupon of the VIE’s notes payable.

Income (principally, interest and fees on loans) earned by our consolidated VIEs was $9.3 million and $2.0 million for the three-months ended March 31, 2015 and 2014, respectively and $19.9 million and $4.2 million for the six-months ended March 31, 2015 and 2014, respectively. Related expenses consisting primarily of interest expense, foreign exchange losses and consumer loan bad debt expense were $6.0 million and $0.7 million for the three-months ended March 31, 2015 and 2014, respectively $17.0 million and $1.4 million for the six-months ended March 31, 2015 and 2014, respectively. These amounts do not include intercompany transactions which are eliminated in our condensed consolidated financial statements.

See Non-recourse debt to EZCORP, Inc. in Note 7 for a description of debt and Derivative instruments discontinued as cash flow hedging instruments in Note 15 for a description of derivatives related to our consolidated VIEs, respectively.

Non-Consolidated Variable Interest Entities

The Company holds a significant variable interest in two VIEs for which it is not the primary beneficiary and, therefore, were not consolidated, as discussed below.

Letters of Credit

We issue letters of credit (“LOC”) to enhance the creditworthiness of our customers seeking unsecured loans from unaffiliated lenders. The letters of credit assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, the principal and accrued interest owed to the lenders by the borrowers plus any insufficient funds fees. In addition we post as cash collateral a specified percentage of the maximum exposure for LOC losses.

Our current carrying value of cash collateral and other assets, is included in “Prepaid expenses and other assets” in our consolidated balance sheets, expected LOC losses and accounts payable are included in “Accounts payable and other accrued expenses” in our consolidated balance sheets, maximum exposure for losses on letters of credit if all brokered loans defaulted and none was collected including the portion of that exposure secured by titles to customers’ automobiles, not included in our consolidated balance sheets, is summarized below:



	March 31, 2015		March 31, 2014		September 30, 2014

	(in thousands)
Consumer loans:
Cash collateral and other assets	$	5,920	$	9,941	$	9,135
Expected LOC losses	2,650		2,460		4,708
Accounts payable	759		1,421		1,026
Maximum exposure for LOC losses*	19,799		25,943		29,502

* These amounts are not recorded in our condensed consolidated balance sheets. Of the total maximum exposure for LOC losses as of March 31, 2015 and 2014 and September 30, 2014, $5.9 million, $7.3 million and $7.8 million, respectively, was secured by titles to customers' automobiles.